The charismatic 54-year-old, who was sacked by Sporting Gijon in January, has achieved five team promotions in his career, two of which, with Sporting and Levante, were into Spain's top flight.
He replaces Miguel Angel Lotina who oversaw Villarreal's relegation on the final day of the season last month at the end of a campaign in which they had started out in the Champions League.
The team known as the Yellow Submarine were Champions League semi-finalists in 2006 and La Liga runners up in 2008.
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